MNI POLICY: BOJ July Minutes: Worry Over System; Overheating

Bank of Japan board members warned that prolonged downward pressure on the profits of financial institutions could create a risk of a gradual pullback in financial intermediation, the minutes of the July 14/15 Board meeting show.

The minutes, released Thursday, said that, "Some members noted that, if the real economy deteriorated for a prolonged period due to the impact of Covid-19, the issue could shift from a liquidity problem to a solvency one and financial system stability could be affected through an increase in credit costs."

At the meeting, the bank left monetary policy unchanged, as widely expected, seeing the recently introduced lending programs to facilitate
financing for smaller firms' working smoothly, with bank lending growing.

POLICY TOP PRIORITY

According to the minutes, one member expressed the view that, "taking into account the experience of the current crisis, the BOJ should further examine appropriate monetary policy conduct during the Covid-19 era," the minutes showed.

One member said that "the top priority for monetary policy for the time being was to contribute to sustaining businesses and employment by continuing to support corporate financing," although others noted that "it was appropriate to consider the policy responses for achieving the price stability target of 2% when the impact of Covid-19 had almost subsided."

Another member said "the BOJ's responses through the three monetary easing measures had been exerting positive effects, said that it was desirable to further strengthen monetary easing by lowering short-and long-term interest rates, in response to a possible increase in downward pressure on prices and with the aim of alleviating firms' and households' interest burden."

FINANCIAL MARKET CONCERN

Some members "pointed out that it was necessary to closely monitor future developments in global financial markets to see whether there would be a correction in asset prices," warning that signs of overheating had been noted regarding stock prices in advanced economies, and that the markets were focusing on the downside tail risk of a significant plunge in stock prices.

Meanwhile, one member said that, "although foreign exchange markets had been stable recently, it was a matter of concern that market liquidity had been declining, as suggested by the decrease in trading volume."

Members also shared the recognition that, if Covid-19 had a larger impact than expected, there was a risk that deterioration in the real economy would affect financial system stability, thereby exerting further downward pressure on the real economy."